A look at the potential consequences
Currently, in England and Wales, properties are most often owned as either freehold or leasehold. Freehold owners have absolute and permanent ownership of land and/or property, whereas leasehold owners own land and/or property for a set number of years, on a lease from a landlord who owns the freehold.
Leasehold ownership has attracted a significant amount of attention in recent years, especially on the issue of ground rent. It came to light that a significant number of leases contained onerous provisions for tenants, such as expensive service charges and fees payable to the landlord by way of permission to carry out certain works on - or legal dealings over – the property. Most recently, it has been the practise of rapidly escalating ground rent provisions that has caught the headlines, such clauses state that the ground rent payable by the tenant – whilst often starting low - will increase every X years of the term, often doubling each time. The prospect of annual ground rent payments that could foreseeably exceed the value of the property has understandably affected the marketability and mortgage-ability of affected properties, and this in turn has prompted several organisations to petition the government to change the law in this area to prevent further exploitation of tenants by landlords keen to maximise their interests.
In the latest in a long line of reports condemning the inequity of the landlord/tenant relationship, the Law Commission published a series of reports on 21 July 2020 which are expected to have a significant impact on the future of home ownership. These reports recommended reforms to: leasehold enfranchisement, the right to manage and commonhold.
Commonhold is said to be an alternative to leasehold ownership. Whilst the idea of commonhold was introduced back in 2002 it did not take off. Commonhold varies from leasehold because it allows flat owners to own the freehold of their individual units, and to manage the shared areas through a company. This therefore means that there are no landlords and that ownership of the unit does not expire or become less valuable over time.
Leasehold enfranchisement is the system which allows leaseholders to buy the freehold or extend their lease. The recommended changes to leasehold enfranchisement include reducing the costs associated with an enfranchisement claim, making the process less complicated and making enfranchisement rights available to more leaseholders. These recommendations are said to benefit leaseholders themselves, and if implemented will have a huge impact on those leaseholders who are affected by onerous provisions in their leases and wish to have those provisions removed.
The final report published by the Law Commission focused on reforming the right to manage. Right to manage allows leaseholders to manage their building without buying the freehold. The Law Commission's recommendations are expected to reduce the costs of making a right to manage claim and make the right to manage availably to more leaseholders.
Benefits of the recommendations
One of the greatest perceived benefits of the Commissions' commonhold recommended reforms, if they take off this time, is that ground rent will become a thing of the past because, quite simply, there will be no landlord; so ground rent simply will not be payable. This will therefore eradicate the issues posed by the escalating ground rent scandal that has plagued conveyancing solicitors and their professional indemnity insurers over recent years.
In addition to the ground rent benefits, commonhold is also said to give the homeowner more control and to eradicate service charges and other aspect of leasehold ownership that currently erode the property's value. Instead, commonhold owners will pay a commonhold contribution to the commonhold association.
The recommendations regarding leasehold enfranchisement and the right to manage are aimed at improving the current leasehold system by making it easier, quicker and cheaper for a leaseholder to exercise their rights and deal with their properties. For too long landlords and developers have been seen to hold all the power and the recommended reforms aim to equalise some of that power.
Deficiencies with the recommendations
Whilst the proposals all sound positive in theory, commonhold has been in existence since 2002 and hasn't yet taken off. The historical problems with the commonhold regime were perceived to be a reluctance by developers, technical difficulties with the regime and a general unwillingness across the market. This includes lenders, because their interests were seen to be less protected than they were under leasehold ownership. There is nothing in the Law Commission's latest report to suggest that these historic concerns will be any less valid in the current day.
Whilst the Law Commission has said that the commonhold regime will be more rational that the complex system of leasehold, and will therefore be more efficient to operate than leasehold law, it remains to be seen how efficient it will be in practice and therefore whether it will attract wider buy-in from stakeholders than it has in the past. It certainly remains unclear whether legal professionals will embrace the unfamiliar commonhold procedures, especially taking into account the potential liability issues if work under the commonhold regime is not done correctly.
So will a commonhold regime work this time around? Whilst the historical problems do appear to have been considered by the Law Commission to some extent, it is likely to take a lot to diminish the current attraction of leasehold ownership to the developer market, in large part due to the ongoing income that a freehold interest can generate. So, whilst the Law Commission's aim is that commonhold will eradicate the need for leasehold (and Professor Nick Hopkins, Law Commissioner has said "Once we have commonhold in a way that works...we do not need long residential leases."), it remains to be seen how the market will be encouraged to move in that direction.
On the face of it, the Law Commission's proposals appear to be greatly improving the situation for leasehold owners. Commonhold would undoubtedly represent a step forward for leaseholders and would eradicate ground rent and other onerous leasehold obligations, whilst simultaneously allowing freehold ownership and self-management of buildings by the flat owners. Not only that, the recommendations on improving leasehold enfranchisement would also be of great benefit in maintaining property values.
The trick will be in persuading developers to adopt the new regime. They have had since 2002 to embrace it and have yet to show any signs of interest. So one senses that the widespread take-up of a commonhold regime will have to be government-led; legislative sticks and/or carrots will most likely be needed, and the government has its hands rather full on other matters at the moment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.